Service Properties Trust Q4 FY2020 Earnings Call

Good morning. Welcome to Service Properties Trust's Fourth Quarter 2020 Financial Results Conference Call. Please note, this event is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Kristin Brown. Please go ahead.

Good morning. Joining me on today's call are John Murray, President; Brian Donley, Chief Financial Officer; and Todd Hargreaves, Chief Investment Officer. Today's call includes a presentation by management, followed by a question-and-answer session with analysts. Please note that the recording, retransmission and transcription of today's conference call is prohibited without the prior written consent of SVC. I would like to point out that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SVC's present beliefs and expectations as of today, March 1, 2021. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, or SEC. In addition, this call may contain non-GAAP financial measures, including normalized funds from operations or normalized FFO and adjusted EBITDAre. Reconciliation of the normalized FFO and adjusted EBITDAre to net income as well as components to calculate AFFO are available in our supplemental package found in the Investor Relations section of the company's website. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained on our Form 10-K to be filed later today with the SEC and in our supplemental operating and financial data found on our website at www.svcreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I'll turn the call over to John.

Thank you, Kristin, and good morning. Our fourth quarter operating results reflect the continuing negative impact of the COVID-19 pandemic on the economy and especially on lodging and certain service retail businesses as well as challenges specific to our SVC hotel portfolio. As previously disclosed, we successfully transitioned the branding and management of over 100 hotels to Sonesta during the quarter. The disruption driven by these transitions, coupled with the holiday seasonality and stricter government lockdowns, had a sharply negative impact on our hotel results in December that weighed on our overall results for the quarter. We also transitioned the branding and management of 78 Marriott hotels to Sonesta in February and expect to transition the branding and management of 10 additional hotels to Sonesta this month. In January, Hyatt provided notice of its intent to terminate our management agreement effective April 8, 2021. We are currently negotiating with Hyatt. However, if we are unable to negotiate a mutually agreeable path forward, we anticipate these 22 hotels will also transition to Sonesta at that time. For all of our recently transitioned hotels, we have entered short-term management agreements with Sonesta through December 31, 2021, to allow for a thorough review of the highest and best use of each hotel. As a reminder, SVC owns 34% of Sonesta and will benefit from Sonesta's growth, have greater flexibility with its Sonesta relationship to manage capital spending more closely and consider selling assets or repurposing some hotels to other uses. Also, SVC will retain more of the upside from the recovery of these hotels. With vaccinations ramping up, weekly COVID case numbers decreasing and lockdown starting to ease in many states, we believe the worst of the pandemic is behind us. While we expect additional disruption to our results from hotels transitioned to Sonesta during the first half of 2021, we are encouraged by recent booking activities. Group booking trends during the last week of January were the highest since last March with most strength coming from smaller group meetings of 11 to 50 people. We expect leisure and travel drive-to locations will see recovery begin this summer. Business transient demand increases are likely to be more gradual, not making a material contribution until 2022 and thereafter. We also believe some of the new normals as we emerge from the pandemic will be a greater focus on safety, service and the travel experience. It's likely that video conferencing technologies people and businesses have utilized during the pandemic will have a longer-lasting negative impact on business travel, which we believe will translate to less impact in value from the major brands' guest rewards programs, which we believe may benefit Sonesta on a relative basis. Our suburban extended stay hotels continue to outperform our urban full-service hotels, a trend we have seen throughout the pandemic. SVC extended stay hotels continue to have a roughly 30 percentage point occupancy premium to non-extended stay hotels, with 165 extended stay hotels reporting occupancies of 56% during the quarter compared with occupancies of 33.4% and 23.5%, respectively, for our 95 select-service and 50 full-service hotels. We expect our diverse portfolio of suburban extended stay hotels will continue to outperform our urban full-service hotels until business travel begins to recover. Importantly, our approximate 41% weighting of rooms in extended stay hotels has positioned us well and has helped us mitigate cash rates. In the seasonally weak fourth quarter, average occupancy for our comparable hotels was 40.4% compared with 44.3% in the third quarter. Average daily rate was $86.84 compared to $90.74 in the third quarter, and RevPAR was $35.08 compared to $40.20 in the third quarter. Turning to our net lease assets. TravelCenters of America, which represents about 27% of our total portfolio based on investment, has continued to operate throughout the pandemic to support the U.S. supply chain. Although negatively impacted by the closure of its full-service restaurants and the decline in the sale of gasoline to passenger vehicles, TA's primary service to the trucking industry, including diesel fuel sales, quick-service restaurant offerings and truck repair services, have shown resiliency and enabled it to navigate the pandemic better than most of our tenants. TA is current on their rent obligations to us. Property level coverage at our TA locations was 1.83x this quarter. Rent collections for our net lease portfolio, including TA, were 95.3% during the fourth quarter. And our service retail asset management team continues to work with our net lease tenants affected by opening and occupancy restrictions. Requests for deferrals have slowed significantly except for certain tenants in the hardest hit industries like movie theaters, whose reopening prospects have changed. Todd will discuss this in more detail. While continued weakness in our hotel portfolio will weigh on our financial results, especially in the first half of 2021, we believe we have passed the worst of the COVID crisis. We have taken many important steps over the past year to preserve capital and solidify our liquidity, including drawing down the remainder of our revolving credit facility in January, addressing our 2021 debt maturities, reducing our quarterly dividend, deferring non-essential capital spending and completing select hotel sales. Supported by steady cash flow from TA and our retail net lease portfolio, we are well capitalized with ample liquidity and well positioned with a diverse portfolio of assets to successfully navigate the gradual recovery for the hotel portfolio. 2020 brought us great challenges, but we believe we have proactively seized opportunities to set the stage for improved future performance. While we are not out of the pandemic woods yet, we are confident about our future growth prospects. With that, I'll turn it over to Todd to discuss our net lease portfolio in further detail as well as our recent transaction activity.

Thanks, John. As of December 31, 2020, we own 799 net lease service-oriented retail properties, including our travel centers, with 13.5 million square feet requiring annual minimum rents of $369.6 million. Representing 42.6% of our overall portfolio based on investment, our net lease assets were 98.7% leased by 177 tenants with a weighted average lease term of 10.9 years and operating under 127 brands in 22 distinct industries at quarter end. The aggregate coverage of our net lease portfolio's minimum rents was 2.14x on a trailing 12-month basis as of December 31, 2020. Rent collections from our retail net lease tenants were stable at 95.3% for the fourth quarter, up from a low of 80.5% for April 2020 and anchored by our largest tenant, TravelCenters of America, which represents 27.3% of our portfolio based on investment. We collected 89.3% of January rents from our tenants, a decline from previous months due to COVID-related temporary closures and capacity restrictions to some of our more geographically and industry-specific impacted tenants, including a casual dining operator in Southern California, a fitness center operator in the Pacific Northwest and some of our movie theaters, an industry which represents 46% of uncollected January rent. We continue to work with our tenants through lease modification and deferral arrangements, and preliminary rent collections in February improved to 93%, more in line with Q4 2020 figures. To date, we have entered into rent deferral agreements with 46 net lease retail tenants with leases requiring an aggregate of $46.4 million. We have deferred an aggregate of $12.1 million of rent from our net lease tenants net of previous deferrals granted and reclassified due to lease modifications or extensions. Monthly collections of previously deferred rents have averaged 82% in September. During the fourth quarter, we recorded reserves for uncollectible revenues of $4.5 million for certain of our net lease tenants. $2.2 million of these reserves related to movie theater leases. As a reminder, we recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. Turning to leasing activity during the fourth quarter. We entered lease renewals for an aggregate of 349,000 rentable square feet at average rents weighted by rentable square feet that were 39.9% below prior rents for the same space. The renewal activity primarily reflects the restructuring of 5 movie theater leases totaling 280,000 square feet, in which the fixed rents will eventually convert to rents based on a percentage of revenues generated in exchange for a longer lease term. The weighted average lease term for renewables was 6.1 years and leasing concessions and capital commitments were approximately $200,000 or $0.08 per square foot per lease year. We also entered into new leases for an aggregate of 50,000 rentable square feet at weighted average rents that were 55.7% below prior rents that were previously above market for the same space. The weighted average lease term for these leases was 10.3 years and leasing concessions and capital commitments were approximately $1 million or $1.86 per square foot per lease year. Turning to our recent transaction activity. During the quarter ended December 31, 2020, we sold 18 hotels, including 8 Marriott branded hotels and 10 Wyndham branded hotels, with 2,046 rooms for an aggregate sales price of $85.8 million, the proceeds of which were used to repay outstanding debt amounts. We are also under agreement to sell 5 hotels with 430 rooms for an aggregate sales price of $22.3 million. SVC is currently leasing these hotels to the potential buyer at an 8% annual return on the purchase price, and we expect the sales to be completed in the second quarter of 2021. The management of 9 former Marriott hotels that were previously targeted for sale was transitioned to Sonesta in mid-December. During the quarter, we terminated an agreement to sell 16 Marriott branded hotels with 2,155 rooms for a sales price of $107.8 million due to the buyer's inability to secure financing. We had previously agreed with Marriott to sell these hotels encumbered by the Marriott brand and the properties will remain Marriott branded, at least until which time the termination of the SVC-Marriott agreement is final. As we've stated previously, the hotels we have sold or are under contract to sell are at prices close to pre-pandemic values. We continue to evaluate our hotel portfolio, specifically the hotels recently transitioned or scheduled to be transitioned to Sonesta to determine when any should be considered for an alternate use or disposition. For the industry overall, we expect to see hospitality investment sales activity pick up starting in the second half of 2021, driven by improving hotel fundamentals as well as the increasing availability of capital, both debt and equity; and are optimistic that similar to our recent sales, any hotels we bring to market will transact at or near pre-pandemic pricing. I will now turn the call over to Brian.

Thanks, Todd. Starting with our consolidated financial results for the fourth quarter 2020, normalized FFO was negative $22.5 million or a loss of $0.14 per share and adjusted EBITDAre was $64.9 million. Our hotel portfolio generated negative $26.1 million of adjusted hotel EBITDA for the fourth quarter of 2020 compared to $106 million of hotel EBITDA in the prior year quarter and compared to being close to breakeven in the third quarter of 2020. For the month of October 2020, our hotel portfolio was cash flow positive, albeit just slightly above breakeven. The months of November and December produced steady declines in occupancy, which we believe are due to a resurgence in COVID cases, normal seasonality and specific to the month of December, our rebranding of over 100 hotels. Rental income from our leased properties declined $16.2 million year-over-year. $8.3 million of this decline relates to our net lease disposition activity, $4.5 million relates to reserves for uncollectible rents, primarily related to movie theater leases; and $2 million related to IHG, the follow-up of our previously leased hotel in San Juan. A $17.7 million decline in FF&E reserve income and a $9.4 million increase in interest expense were partially offset by a $4.7 million decline in G&A expense due to lower business management fees also impacted our overall results this quarter. For our 302 comparable hotels this quarter, RevPAR decreased 59.2%, gross operating profit margin percentage decreased by 28 percentage points to 7.5% and gross operating profit decreased by approximately $145 million over the prior year period. Although the GOP line costs at our comparable hotels declined $9.7 million from the prior year, FF&E reserves, management fees, system and other costs that are tied to hotel revenues declined $21.2 million. These expense savings were partially offset by a $12.2 million increase in one-time costs, including expenses for the rebranding of certain hotels to Sonesta during the quarter. Our consolidated portfolio of 310 hotels generated operating losses of $45 million for the quarter. $38 million or 84% of these operating losses were generated by our 50 full-service hotels. Full-service urban hotels in key markets where lodging activity is the most depressed, such as San Francisco, Chicago, Boston and D.C. to name a few, continue to weigh on the portfolio. $4 million of hotel operating losses were from our 95 select service hotels. Our 165 extended stay hotels continue to perform relatively well and were slightly below breakeven this quarter, generating a small operating loss of $2 million; and were negatively impacted by the rebranding of 81 extended stay hotels in December. Excluding $15.1 million of rebranding costs and a $4 million legal contingency for certain hotels, adjusted hotel EBITDA for the 2020 fourth quarter was a negative $26.1 million. Turning to our balance sheet liquidity. As of quarter end, debt was 51.8% of total gross assets, and we had $91.5 million of cash, including $18.1 million of cash escrowed primarily for future improvements to our hotels. Our overall cash burn in Q4 averaged approximately $10 million per month based on our adjusted hotel EBITDA for the fourth quarter and pro forma for the full drawdown of our revolving credit facility. We currently expect our cash burn to be similar in the first quarter of 2021 relative to Q4, given the continued weakness in the hotel industry, the impact of seasonality and additional disruption from a significant number of additional hotels being rebranded. However, our solid base of triple net lease assets largely covers our corporate overhead, including debt service costs. Based on our current outlook and expectation that lodging activity will improve in the back half of 2021, we currently expect to be cash flow positive for the full year 2021 before any capital expenditures. We funded $32.4 million of capital improvements during the fourth quarter, primarily for maintenance capital and ongoing renovations at certain Marriott and Sonesta hotels as well as for rebranding certain IHG hotels in December. For the full year, SVC completed 18 hotel renovations.

Pardon me, it appears the speaker line has disconnected. We'll try and get them back on the line momentarily. Please hold on and thank you for your patience.

Thank you. As of today, we have approximately $950 million of cash after fully drawing down our $1 billion credit facility as a precautionary measure to preserve our liquidity. As previously disclosed, we expect to be out of compliance with one of the financial covenants under our debt agreements that will prohibit us from incurring additional debt until we are back in compliance, which we currently don't expect to occur until the first half of 2022. As a reminder, we secured waivers of all the existing financial covenants under our credit agreement through July 2022, but are still subject to the covenants under our bond indentures. Regarding our common dividend, we currently expect to maintain the current quarterly distribution rate of $0.01 per share through mid-2022, which we agreed to as a provision of our amended credit agreement. We currently believe we have adequate liquidity through 2022. Our next debt maturity is in August of 2022, and we will continue to assess and explore all of our options to ensure we are well positioned until this pandemic is behind us.

Our first question comes from Bryan Maher with B. Riley Securities.

A couple of questions. When you look back at the fourth quarter and the lodging results specifically, what was the bigger source of pain? Was it the conversion of the hotels to the Sonesta brand or was it the full-service urban hotels? And are you seeing any signs of positivity as you look to 2021 on the full-service urban?

Bryan, that's a good question. I mean the fourth quarter, there was definitely a significant impact from the transitioning of 100 hotels. We continue to see weakness. We still have a couple of full-service hotels that are closed. We are not seeing a big pickup yet in business travel. So the urban full-service hotels have had pretty weak occupancy levels. We did see after the Thanksgiving holiday and into the year-end holidays that a number of states and cities increased their restrictions and reduced the amount of occupancy that various businesses could have. So there were a lot of negative factors all coming together for what is always a weak quarter anyway. So as we look forward, we are seeing measurable, solid improvement in the hotel portfolio, both at the extended stay, select-service and full-service hotels. But it's most anemic for the full-service hotels because business travel still hasn't recovered as we've headed into the first quarter, and those are mostly urban locations. So we don't expect to see our full-service hotels experience material improvement until the back half of 2021 and really into 2022 and 2023.

Okay. And as you transition these hotels to the Sonesta brand, now that you have kind of a lot of them under your belt converted, what has typically been the conversion cost, whether it's signage or other costs that you have, to make them Sonesta's from the Marriott's and InterCon's?

Bryan, I'll take this one. It's Brian. So we had about $15 million of expenses run through the hotel ledgers for the quarter and a big portion of that relates to putting people out in the field for IT conversions and getting those systems set up as well as procuring supplies with the brand name audit and whatnot. The capital side of it will relate to permanent signage on the buildings and around the property and inside the hotel as well as the hardware for the technology side. So in the past, we've talked to people about roughly $300,000 per hotel. Half of that will run through the P&L and the rest of it will be capital.

Okay. And then after drawing down the $950-or-whatever million that you have now sitting in cash, I get it that you have things you need to worry about over the next year. But what would it take for you to see, whether it's sometime during 2021 or maybe early 2022, to start to return some of that cash and pay down the facility?

Yes. We're not prepared to pay down the facility until our covenant issues are behind us. So I mean I think we're looking at 2022 at the earliest.

The next question is from Tyler Batory with Janney Capital Markets.

I wanted to circle back to the Sonesta transition real quick, if I could. I know it's so early, but obviously, some disruption making those transitions, which is as expected. Any sense for the properties you converted in December, how much disruption there was in January, February relative to December? And any thoughts in terms of how long it might take for operations to return to normal, so to speak, at some of the properties that have already been transitioned?

Yes, that's a good question. It's somewhat challenging to provide a precise measurement due to the various impacts from COVID and seasonal factors. However, based on our observations, it appears that prior to the transition, the outgoing brand stops its reservation system for dates beyond the conversion date. You cannot obtain a new GDS code for reservations for the new brand until the transition takes place since the same hotel cannot be listed in the reservation system under two different codes. This creates some technical challenges during the transition process that lead to a decline in occupancy right after the switch. It seems that RevPAR typically decreases by about 25 to 33 percent from its pre-conversion level, but it generally recovers roughly half of that loss in the ensuing months. We expect to return to pre-transition levels within approximately three months post-transition, indicating a disruption of around 25 percent.

That’s helpful. I’d like to follow up on the strategic aspect of asset sales related to hotels. I'm particularly interested in the extended stay properties and those that have transitioned to Sonesta, as many of them have short-term contracts. What factors are you considering when it comes to potential asset sales? Is it mainly a pricing issue that could influence your decision to be more aggressive in selling some assets from the portfolio?

There's a variety of factors that we're considering. One of those factors is the extent of capital needs. Another, obviously, is the projected performance. Another is the market concentrations. We had some markets where we had a couple of Sonesta hotels, a couple of Marriott extended stay hotels, a couple of IHG extended stay hotels. Now if they are all Sonesta extended stay hotels, that may be too many in any given market. So I'd say those are the primary factors we're considering. I should add, we're also considering what other uses. In some markets, there's a shortage of affordable housing, and there may be attractive conversion opportunities to move from a hotel to a multifamily use. And so in select markets, we're evaluating that as well.

Okay. Okay. And then just last question for me. Brian, on the CapEx side of things, can you just remind us the spend in the fourth quarter and the split between maintenance versus renovation/rebranding? And then any commentary in terms of the future outlook for those items in 2021 would be helpful, too.

Sure. So about half of that number in Q4, I would say, was maintenance CapEx. We had some renovations we were finishing up with some of those costs spilled over. And I would say about $5 million to $10 million approximately was related to the conversion costs. A lot of those numbers will spill over into 2021. Yes, so I had put out a number in the prepared remarks for 2021 of approximately $192 million for the spend. I would say about $110 million of that is related to maintenance CapEx and the conversion costs with the remainder I would describe as discretionary related to renovation activities. We've got several large projects going on in Kauai as well as Chicago and some in California as well. But again, the maintenance piece of it is roughly $75 million to $80 million.

The next question is from Dori Kesten with Wells Fargo.

Can you tell us what the RevPAR index of the Sonesta brand was pre-conversion?

Sorry, Dori, could you say that again?

Dori, we don't have the index numbers handy. We can follow up on that one.

Okay. As you review the hotels that converted to Sonesta, do you have a target for internal asset sales this year? You mentioned that pricing would be similar to pre-pandemic levels. In general, is that around a 10x multiple on 2019 figures?

We don't have a specific target for asset sales. While some hotels may not be sold, they could be removed from our hotel base and repurposed for other uses, such as multifamily developments. Regarding the select-service hotels we sold this year, we performed slightly better than the broker opinions of value from mid-2019, which indicated that the hotels needed capital improvements. Considering the Property Improvement Plans, the cap rates were around 10%.

Okay. And Brian, since we may not have a great look through on taxable income when it comes to 2022, is there a decent way do you think to get back into what a potential dividend payout could be, perhaps as simple as a percentage of FFO per share?

Yes. I think the way to look at it with the hotel losses that we've been building up, we probably won't have any taxable distribution requirement in the foreseeable future. When you compare it in the way we used to report coverage, if we're not over 1x and the hotels aren't making the returns, we're running taxable losses, is the way I look at it from a simplistic standpoint. Obviously, there's more tax nuances than that, but that's sort of the benchmark. If we're not earning sort of the full returns under our hotel contracts, there are taxable losses being incurred, generally speaking.

Okay. So looking out to '22, you may not be paying then based on that?

It's possible. It's really too early to tell for '22. But '21, I feel comfortable saying that.

The next question is from Jim Sullivan with BTIG.

The first question is about CapEx. I understand that under the covenant waiver agreement you mentioned in the release, you have the ability to spend up to $250 million annually on CapEx. Additionally, there's an allowance for up to $50 million for certain other investments per year as specified in the agreement. Can you clarify what types of other investments qualify for that $50 million?

Jim, this is Brian. I'll take that one. Thanks for the question. Yes, we have various opportunities that come up every so often relating to the property surrounding our current properties that could help the operation or another example would be, if we have a ground leased property, we could buy out the ground lessor, so anything that really adds value to our existing portfolio. That carve-out really, not meant for new acquisitions. It's really just value-enhancing ancillary-type transactions for the existing portfolio.

Okay. And then in talking about the strategy, and I think, John, you touched on this in your prepared comments, the initial agreements with Sonesta are short term while the company considers what to do with the assets, ultimately, whether to convert them or sell them or what have you. And I just wonder if you can help us anticipate after that 1-year term and after you've gone through the portfolio and decided what to keep and presumably to continue to have managed by Sonesta. Can you just give us some indication as to whether it would be contemplated at that time that the agreement with Sonesta would be long term in line with kind of the agreements you previously had with Marriott and InterContinental? Or whether they would continue to have more flexibility than the prior agreements that were in place?

Yes, Jim, that's a good question. Our expectation is that around the end of this year, once we've settled everything and decided what we will do with each of the hotels, the ones that will stay in the Sonesta portfolio will have long-term contracts similar to the previous Sonesta portfolio management agreement prior to these transitions. So it would be a long-term management agreement.

Okay. Would those agreements offer any additional flexibility compared to the contracts you had with Marriott and InterContinental? Or would they be quite similar? I'm particularly considering the fact that the Sonesta brand is largely unproven. Would there be a possibility for Service to cancel the contract in the event of not meeting the budget or underperforming compared to an index or through another cancellation method?

Yes, I didn't review the terms of the existing agreement before the call, and I apologize for that. There are provisions for termination rights in the event of poor performance, which gives us some flexibility. Since Sonesta is an affiliate, we have a bit more leeway in terms of collaborating with them on capital investments and the specifics of individual hotels. If any hotels are underperforming, we should not only evaluate their potential this year but also regularly assess the portfolio to determine if we need to divest weaker-performing properties. Our affiliation gives us greater flexibility in this regard compared to situations with other brands like Marriott or IHG.

Okay. And then, John, again, you touched on the business travel exposure of the major brands and how that has impacted performance post-COVID. Early days, I know, with the Sonesta brand, but can you give us any indication as to Sonesta's mix of business and how it contrasts with, say, Marriott or IHG?

I believe that overall, leisure travel has been the primary driver regardless of the brand. Throughout the pandemic, there has been a significant amount of contract business from various groups, including visiting nurse associations, individuals in quarantine, and the National Guard, who have been deployed to assist in different areas during surges. This type of business has been COVID-related in various ways. Consistently, we've observed this trend across all brands, and it seems a bit stronger for Sonesta due to their focus on extended stay hotels. The older campus-style developments in Sonesta's portfolio have been viewed as safer compared to newer extended stay hotels that are typically situated in single buildings, which require passing through common areas like lobbies, staircases, or elevators. Guests could go directly to their rooms without these interactions. As a result, Sonesta gained market share during the pandemic, primarily through either pandemic-related business or leisure travel, with minimal contributions from business travel.

Okay. And then finally for me. Given that Service has a significant equity interest in Sonesta, and as the Sonesta brand becomes a much bigger business on its own right with the continued transition to the brand this quarter and perhaps later in the year, I wonder what you can tell us about the outlook for Sonesta in terms of profit or loss. Some indication, very broad brush, obviously, and it's very early days, I understand, but when would one anticipate that Sonesta could possibly breakeven or make the profit?

Yes, I believe Sonesta is experiencing rapid growth. There will be costs and challenges that they faced in the fourth quarter and will continue to face in the first half of 2021. However, with an increase in leisure travel during the second and third quarters, and the potential recovery of business travel later in the year, we currently anticipate that Sonesta may achieve slightly positive net income for 2021. They are also waiting for the results of a shareholder vote concerning a merger agreement with Red Lion Hotels, which will allow them to enter the franchising sector. I think that the combination of these developments will position Sonesta among the 10 largest hotel operators and franchisors in the United States. While the initial contribution from franchise growth may be small, we expect it to increase for Sonesta over time, leading to profitability in the future.

This concludes our question-and-answer session. I would like to turn the conference back over to John Murray for any closing remarks.

Thank you, everyone, for joining us today. We appreciate your interest. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.